Wells Fargo faces tougher road ahead

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I've noted the rise of Wells Fargo as a mortgage powerhouse, and over the past few years, it has been able to leverage its relatively strong balance sheet standing to carve out the largest share of the market.

It now controls roughly one-third of the market, which has boosted earnings substantially.

But DealBook and others have come to an interesting conclusion: "its strong gains may not be sustainable, unless interest rates drop significantly or the housing market recovers substantially. Both are long shots."

Favorable monetary policy and low rates have indeed fueled earnings recently.

"While the Fed has promised to purchase more mortgage bonds, interest rates may not fall much further. If mortgage rates stagnate or rise, fewer borrowers are likely to refinance or buy a house. And if the mortgage bond market weakens, banks will make less of a gain when selling the mortgages." 

I certainly agree that rate-driven refinancing and purchasing activity may slow even more for the rest of the year, which would dampen the bank's momentum. Citigroup's Keith Horowitz wrote to clients that, "Mortgage showed signs of topping out, with new application volume down 19% quarter-over-quarter, accelerating the 10% drop seen last quarter, while mortgage originations fell 10% quarter-over-quarter, the first drop since mid-2011."

But at the same time, there may be economically driven purchasing demand that continues strong. If the economy continues to improve, we may see a groundswell of new buyers that have been out of the market during the economy sluggishness. Still, the prudent course for Wells Fargo would be to continue to focus on its wealth management and investment banking activity, which could provide powerful offsets if the retail business slows precipitously.

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